David Frank
Independent Analyst
Straight through processing (STP) brokers operate without an intervention of a “dealing desk”. There is no market making such that all orders are directed to liquidity providers (other brokers and banks) where they are executed at the bid rate provided by those liquidity providers. Everything from placing the orders to closing them is done without any manual intervention. In such an engagement, the liquidity provider is a principal and final counterparty to your trade.
STP brokers are known to offer affordable Forex accounts, less or no conflict of interest between the broker and the client, higher price transparency, more availability in the marketplace and higher liquidity. They ensure the best Bid and Ask price, and the order is executed fast.
When choosing a broker, you have to make sure that you are choosing a true STP broker. The following are indicators of a true STP broker.
Liquidity pool depends on the number of liquidity providers an STP broker contracts. The more the number of liquidity brokers in a pool, the deeper the liquidity that results to a better bid/ask rate and resultant lower spreads. Having one liquidity provider is the same as having a market maker.
Market makers do not transfer all trades onto liquidity providers. Instead, they take the other side of trader’s position and use manipulative tactics to make a profit.
Brokers can offer fixed or variable spreads. A broker offering fixed spreads does not adjust spreads for clients based on the lowest bid/ask prices. The spreads remain fixed at all times. On the other hand, when a broker offers variable spreads, he picks the best Bid price from one liquidity provider and the best Ask price from another liquidity provider and delivers the best deal to his clients.
Beware of brokers who increase the spread (marking up) in addition to the commission they charge you, they could be market makers masquerading as true STP brokers.
They offer anonymity
STP brokers offer anonymity for the client as there are no dealing desks monitoring orders coming in since orders are executed automatically through the market network. The liquidity provider does not know the trader; he only knows the broker. It’s advantageous to the trader for he can have as many open positions with the liquidity provider at the same time.
They provide quick execution
There are two main types of execution the first one being instant execution where the order does not go to the market. Instead, it is instantly filled by the broker. The other type of execution is referred to as market execution where the order is based on the available quote from the liquidity providers.
The absence of intermediary process allows the STP broker to process its clients order quickly without any delay. Also, the STP broker will not send re-quotes to its client’s which is a huge advantage to most investors. The STP broker can allow its clients to trade without any restrictions during the release of financial news.
There are two types of regulation. STP regulation and match maker regulation. STP regulation allows the broker only to receive and directly transmit orders to liquidity providers without any intervention whatsoever. The regulations bar them from acting against the client. Should they disobey the regulations by acting against the client, consequences are that they lose their license for good.
Market maker regulation on the other hand not only allows the broker to send orders to the market but also to act directly as a counterpart. Market makers are allowed to deal on their own account thus enabling them to hold clients trade without transmission. This brings about conflict of interest as the traders loses becomes automatically the brokers gain.
True STP brokers offer a lot of advantages to a trader as opposed to a Dealing Desk Forex broker who “makes the market” for traders such that traders don’t see real market quotes and the broker makes money through spreads that are mainly fixed.
STP brokers are known to offer affordable Forex accounts, less or no conflict of interest between the broker and the client, higher price transparency, more availability in the marketplace and higher liquidity. They ensure the best Bid and Ask price, and the order is executed fast.
When choosing a broker, you have to make sure that you are choosing a true STP broker. The following are indicators of a true STP broker.
They have great liquidity
The number of liquidity providers that an STP broker has determines the depth of the liquidity pool. A true STP broker signs a business contract with a small group of liquidity providers (internal liquidity pool). The liquidity providers in this pool compete with each to offer the best bid/ask rates for orders from the STP broker. Some of the strong famous liquidity providers are; Barclays Bank, JP Morgan, Citi Bank, TD Bank and Wells Fargo.Liquidity pool depends on the number of liquidity providers an STP broker contracts. The more the number of liquidity brokers in a pool, the deeper the liquidity that results to a better bid/ask rate and resultant lower spreads. Having one liquidity provider is the same as having a market maker.
Market makers do not transfer all trades onto liquidity providers. Instead, they take the other side of trader’s position and use manipulative tactics to make a profit.
They have tightspreads
An STP brokerage usually makes a profit by charging traders a commission. The more they trade, the more they make money thus it is in their interest for clients to make money that helps to eliminate conflicts of interest between the trader and the broker.Brokers can offer fixed or variable spreads. A broker offering fixed spreads does not adjust spreads for clients based on the lowest bid/ask prices. The spreads remain fixed at all times. On the other hand, when a broker offers variable spreads, he picks the best Bid price from one liquidity provider and the best Ask price from another liquidity provider and delivers the best deal to his clients.
Beware of brokers who increase the spread (marking up) in addition to the commission they charge you, they could be market makers masquerading as true STP brokers.
They have transparency
Since there is no dealing desk, it means that the STP broker is more transparent with the client.The client trades into a true market that obtain better and quicker fills through an STP broker as opposed to an artificial market that may be created by a market maker.
They offer anonymity
STP brokers offer anonymity for the client as there are no dealing desks monitoring orders coming in since orders are executed automatically through the market network. The liquidity provider does not know the trader; he only knows the broker. It’s advantageous to the trader for he can have as many open positions with the liquidity provider at the same time.
They provide quick execution
There are two main types of execution the first one being instant execution where the order does not go to the market. Instead, it is instantly filled by the broker. The other type of execution is referred to as market execution where the order is based on the available quote from the liquidity providers.
The absence of intermediary process allows the STP broker to process its clients order quickly without any delay. Also, the STP broker will not send re-quotes to its client’s which is a huge advantage to most investors. The STP broker can allow its clients to trade without any restrictions during the release of financial news.
Types of regulation
It is advisable to always ensure that you engage services of a regulated broker. Regulation assures traders of the strength of the broker and integrity. Some of the leading regulators are the following; Cyprus Securities and Exchange Commission (CySEC), National Futures Association (NFA), Financial Services Authority (FSA UK) and Commodity Futures Trading Commission (CFTC)There are two types of regulation. STP regulation and match maker regulation. STP regulation allows the broker only to receive and directly transmit orders to liquidity providers without any intervention whatsoever. The regulations bar them from acting against the client. Should they disobey the regulations by acting against the client, consequences are that they lose their license for good.
Market maker regulation on the other hand not only allows the broker to send orders to the market but also to act directly as a counterpart. Market makers are allowed to deal on their own account thus enabling them to hold clients trade without transmission. This brings about conflict of interest as the traders loses becomes automatically the brokers gain.
True STP brokers offer a lot of advantages to a trader as opposed to a Dealing Desk Forex broker who “makes the market” for traders such that traders don’t see real market quotes and the broker makes money through spreads that are mainly fixed.
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Editors’ Picks
EUR/USD flirts with daily highs, retargets 1.1900
EUR/USD regains upside traction, returning to the 1.1880 zone and refocusing its attention to the key 1.1900 barrier. The pair’s slight gains comes against the backdrop of a humble decline in the US Dollar as investors continue to assess the latest US CPI readings and the potential Fed’s rate path.
GBP/USD remains well bid around 1.3650
GBP/USD maintains its upside momentum in place, hovering around daily highs near 1.3650 and setting aside part of the recent three-day drop. Cable’s improved sentiment comes on the back of the Greenback’s irresolute price action, while recent hawkish comments from the BoE’s Pill also collaborate with the uptick.
USD/JPY edges up above 153.50 with all eyes on US CPI figures
USD/JPY appreciates above 153.00 but remains on track for a 2.4% weekly loss. Trading volumes remain subdued on Friday, ahead of the IS CPI release. The Yen remains supported by hopes of a stable government and calls for further BoJ tightening.
Editors’ Picks
EUR/USD: Yes, the US economy is resilient – No, that won’t save the US Dollar Premium
Some impressive US data should have resulted in a much stronger USD. Well, it didn’t happen. The EUR/USD pair closed a third consecutive week little changed, a handful of pips above the 1.1800 mark.
Gold: Metals remain vulnerable to broad market mood Premium
Gold (XAU/USD) started the week on a bullish note and climbed above $5,000 before declining sharply and erasing its weekly gains on Thursday, only to recover heading into the weekend.
GBP/USD: Pound Sterling remains below 1.3700 ahead of UK inflation test Premium
The Pound Sterling (GBP) failed to resist at higher levels against the US Dollar (USD), but buyers held their ground amid a US data-busy blockbuster week.
Bitcoin: BTC bears aren’t done yet
Bitcoin (BTC) price slips below $67,000 at the time of writing on Friday, remaining under pressure and extending losses of nearly 5% so far this week.
US Dollar: Big in Japan Premium
The US Dollar (USD) resumed its yearly downtrend this week, slipping back to two-week troughs just to bounce back a tad in the second half of the week.
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